Boeing warns Seattle could lose 777X if deal rejected

By Alwyn Scott, Tim Hepher and Dominique Vidalon | Small Business

By Alwyn Scott, Tim Hepher and Dominique Vidalon

(Reuters) - Boeing Co said on Friday it was ready to look for another location to build its newest jet if assembly workers and local politicians do not ratify plans to build it in the Seattle area, its traditional manufacturing base.

The U.S. planemaker issued the warning just hours after senior members of the International Association of Machinists union voiced strong opposition to a proposed labor contract that is due to go to a membership vote next Wednesday.

"Vote no and prepare for a strike in 2016," said one of hundreds of comments, most of them negative, on the union's Facebook page.

"Vote hell no!" said another.

The discord appeared to threaten tentative deals reached this week that would lock in labor costs and secure Boeing substantial tax breaks in exchange for building the 777X in the Seattle area, where it builds the current 777.

Political leaders said union opposition to the contract only heightened the need for legislative action on tax breaks and other incentives for Boeing.

"This makes it even more urgent," said Alex Pietsch, chief of the Washington governor's office of aerospace. "We need to demonstrate the state is firmly standing behind the company and the machinists."

The state senate appropriations committee was due to hear testimony on the measures on Friday, following a similar hearing in the house on Thursday that was broadly in favor of granting about $8 billion in tax breaks to aerospace and funding a $10 billion transportation infrastructure package.

Governor Jay Inslee proposed the package this week in calling a special session of the legislature that began on Thursday. He is in daily discussions with Boeing and union leaders, his spokesman said.

Analysts reacted cautiously to the union opposition, saying a deal could still be reached, despite the heated rhetoric. And investors took it in stride, as Boeing shares were up 1.3 percent at $133.21 at midmorning on Friday on the New York Stock Exchange.

"It's not over till it's over," said Rob Stallard, an analyst at RBC Capital Markets. "As we've seen every time these things happen, there is a lot of rhetoric that doesn't necessarily help in trying to fathom the final outcome."

Ken Herbert, an analyst at Canaccord Genuity, said, "I do not think all of the back-and-forth here really worries investors."

TENSIONS HIGH

Boeing's latest jet - the 777X, a successor to its most profitable long-haul aircraft - would secure thousands of jobs in the Seattle area, which is competing with nonunionized workers in the U.S. South, where wages are lower.

After confidential and exclusive talks first reported by Reuters, Boeing and its main union reached a preliminary deal this week that calls for the wings and fuselage of the 777X to be built in the Puget Sound area.

The deal calls for lower healthcare benefits and a new retirement plan, and a separate draft agreement with state officials would provide for tax and other incentives.

An unusually large group of more than 500 machinists turned out on Thursday night for a noisy open mic meeting at the union hall in Seattle, knocking Boeing's plan to eliminate pension benefits and boost health insurance costs, among other issues.

"It was overwhelmingly against Boeing's proposal," said Jonathan Battaglia, a union spokesman.

"Tensions are running very high."

The Seattle Times reported that a senior local union official tore up a copy of Boeing's contract offer and described it as "crap," before telling a noisy meeting of disgruntled machinists that he would try to have it withdrawn.

"I can't say whether he said 'crap' or not, but he expressed his opinion and it was not in favor," said Battaglia, referring to machinists district president Tom Wroblewski.

"He expressed openly that he didn't approve of the contract. The members needed to hear that."

The vote by 31,000 members is still scheduled to go ahead on Wednesday and there are no scheduled talks with Boeing about a different offer, Battaglia said.

Earlier on Thursday, hundreds of assembly workers marched in the aisles of Boeing's huge Everett plant, where nearly all its wide-body jets are currently built, and chanted slogans calling for the contract to be rejected.

"Workers were expressing their opinions," Battaglia said. "It's part of the democratic process."

In an emailed statement, Boeing said that barring a "yes" vote from the union on the contract, it would begin talking to other potential locations.

"All of our options are still on the table, including those within Boeing and interest we have received from outside," a Boeing spokesman said in an emailed statement.

"We chose to engage in Puget Sound first, but without full acceptance by the union and legislature, we will be left with no choice but to open up the process competitively and pursue other options for locating the 777X work," he said.

"And if not ratified per the scheduled vote on November 13, we will begin taking the next steps."

Industry experts say Washington state faces competition from states including South Carolina, where Boeing assembles some of its 787 Dreamliners, as well as Texas and Utah.

With good infrastructure and hundreds of acres of land available near Boeing's plant in South Carolina, that region "could easily support the 777X," said Peter Arment, an analyst at brokerage Sterne Agee. "Economically, it's an easier decision to move it than not. Opposing this labor deal secures that long-term incremental growth for wide-body production will be outside Seattle and most likely in South Carolina."

Japan, whose heavy industry builds wings for the Dreamliner, is seen as a contender to build the wings for the 777X, the longest wings designed for a Boeing jetliner.

The new standoff comes as Boeing prepares to launch the 777X with potentially record orders at the Dubai Airshow. But the discord is not expected to derail those plans, industry sources said.

The head of European airline group IAG said on Friday it was interested in the 777X for Iberia and British Airways.

(Reporting by Tim Hepher and Dominique Vidalon in Paris, Alwyn Scott in New York and Jonathan Kaminsky in Olympia, Wash.; editing by Mark Potter, John Wallace, Phil Berlowitz and Matthew Lewis)